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Buffett’s Berkshire Saw Earnings Plunge, But Does it Matter?
Stock Analysis & Ideas

Buffett’s Berkshire Saw Earnings Plunge, But Does it Matter?

The volatility in the stock market took a toll on Berkshire Hathaway’s (NYSE:BRK.A)(NYSE:BRK.B) Q1 earnings. The firm that engages in a diverse range of business activities delivered net earnings of $5.46 billion, down from $11.71 billion in the prior year.

While Berkshire’s net earnings plunged about 53%, Warren Buffett stresses focusing on operating income. Let’s dig deeper into Berkshire’s Q1 earnings to discover why. 

Q1 Performance

The weakness in Berkshire’s insurance underwriting business was offset by gains in railroads, manufacturing, and retail. However, the realized/unrealized losses from the change in market prices of its investments in equity securities dragged Q1 earnings down. 

Notably, Berkshire owns an extensive equity investment portfolio. Any fluctuation in the market prices of these securities results in substantial realized/unrealized gains and losses and leads to significant volatility in its earnings. 

For instance, due to the volatility in the stock market, Berkshire reported investment and derivative contract losses of $1.58 billion in Q1 compared to a gain of $4.69 billion in the prior year. 

Warren Buffett, in his letters to shareholders, has often emphasized comparing the firm’s operating income to evaluate performance rather than net earnings. In its latest SEC filing, the company highlighted that the investment and derivative gains/losses due to changes in market prices of equity securities are generally meaningless to evaluate the economic performance of the company. 

It’s worth noting that Berkshire reported operating earnings of 7.04 billion in Q1, which improved marginally from $7.02 billion in the prior year. 

While Berkshire’s operating earnings remained stable, its CEO and ace investor, Warren Buffett, announced during the annual shareholders’ meeting that Berkshire is increasing its stake in Activision Blizzard (NASDAQ:ATVI). Further, Berkshire poured more money into Chevron (NYSE:CVX) and now holds sizeable investments in Occidental (NYSE:OXY) and HP (NYSE:HPQ). 

Unsurprisingly, Buffett maintained his stance on Bitcoin (BTC-USD) and said he wouldn’t be a buyer.

Bottom Line   

Buffett’s stellar long-term track record is unquestionable. However, the volatility in the stock market has weighed on his top picks, including Apple (NASDAQ:AAPL) and Bank of America (NYSE:BAC). 

Nevertheless, Berkshire’s operating income remained stable amid a challenging operating environment, which shows the resilience of its business. The strength of its business is also reflected in Berkshire’s stock price, which is trading in the green this year, regardless of the increased volatility in the market. 

On TipRanks, Berkshire Hathaway’s lowered priced Class B shares sport a Hold recommendation. Meanwhile, the average price target of $356.67 implies 10.5% upside potential to current levels.

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